Transcript: Nightly Business Report — March 26, 2015

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and
Sue Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Risks to the market.
Earnings are expected to be weak, economic data has been so-so, and now
there`s a new potential headwind for stocks.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Cold shoulder.
Investors are turning their backs on the transports. And that could say a
lot about where the economy is heading.

HERERA: A rare occurrence is happening on Capitol Hill and it could
mean changes are coming to Medicare.

All that and more tonight on NIGHTLY BUSINESS REPORT for Thursday,
March 26th.

MATHISEN: Good evening, everyone, and welcome.

The stock market as I don`t need to remind you is a perplexing place.
Some days, it rises despite global shocks. On January 7th, for example,
the day of the terror attack at the Paris magazine “Charlie Hebdo,” the Dow
Jones Industrial Average rose 212 points. Other days, world events bring
stocks down.

Today was one of those days. Not only was there word that that
Germanwings aircraft was deliberately crashed by its co-pilot but new risks
arose in the already chaotic Middle East — still, the world`s biggest oil
producing region. Saudi Arabia and the few of its regional allies began
Houthi rebel strongholds in Yemen where the government has disintegrated
and the Shia rebels have Iran`s backing. Ground troops may be next.

All that, plus economic and profit worries was more than the market
could withstand today. The Dow Jones Industrial Average dropped 40 points
to 17,678. NASDAQ fell 13 and the S&P 500 was down almost 5.

The conflict in Yemen was really felt in the oil markets. West Texas
Intermediate shot up more than $2 a barrel to $51.43. Brent prices also
spiked higher.

Jackie DeAngelis has more now on the Mideast tensions and why they`re
rattling oil.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Oil prices
seeing a significant setback on geopolitical turmoil in the east. Reports
of Saudi air strikes in Yemen and Saudis and Egyptians in the country,
taking West Texas Intermediate to its highest level since March 4th. The
reason they care about Yemen is because it lies next to a key strait that
moves nearly 4 billion barrels of oil to the Suez Canal every day. It also
concerns the market, when Saudi Arabia, the world`s largest oil producer,
gets involved in conflict.

The Saudis are taking this on because the rebels in Yemen are reported
Shias, backed by Iran. Saudi Arabia trying to tamp down the Iranian
influence in the Middle East. In addition, the U.S. still imports a lot of
international crude, roughly 8 million to 9 million a barrel a day. It`s a
different grade crude than we produce at home and has specific uses.

The markets have been nervous about Libya and Iraq as tensions made
their output volatile, adding the Yemen conflict to the list has rattled
some nerves.

Having said that, we see very volatile moves in crude as of late in
both directions. And traders are saying we need to monitor the situation
abroad and see how it plays out. Still, no one wants to be short when
tensions are running high.

For NIGHTLY BUSINESS REPORT, I`m Jackie DeAngelis.

(END VIDEOTAPE)

HERERA: Another issue facing the market, the transports. Usually
seen as a leading indicator of economic growth, the group has started to
slow with some on Wall Street concerned the transports could be showing
some cracks. And that could lead to even bigger troubles.

Morgan Brennan has more.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
2015 has been rough on transport stocks. The Dow Jones Transportation
Average is down more than 4 percent so far this year, vastly
underperforming the broader stock market. Today, it tested a key technical
level, briefly falling below its 200-day moving average. Experts are
watching the group closely, since transports are correlated with economic
growth.

SCOTT WREN, WELLS FARGO ADVISORS: I think it`s been a fear of slower
global growth than what people thought and a day like today when you have
oil rally, the transports, it`s hard for them to act positively in an
environment like that.

BRENNAN: The reason rallying crude is pressuring these stocks, which
tend to trade opposite oil on the presumption that lower fuel means higher
profits but a bigger issue may be beginning to take root as well — a
slowdown in freight volumes across different modes of transports.

This week, the American Trucking Association reported that trucking
fell 3 percent in February from the month prior. And according to weekly
numbers from the Association of American Railroads, car load traffic has
been waning as well, led lower by declines in coal, crude oil and products
used for drilling.

As the quarter comes to a close, investors are worried about how this
will affect earnings, especially if some companies, like Kansas City
Southern (NYSE:SO) (NYSE:KSU) cut guidance.

(on camera): Avondale Partner`s Donald Broughton notes that all of it
could be pointing to a slowdown in U.S. economic growth. Still, the dip
means there are potential deals within the transport space.

Many analysts still like companies catering to consumers, parcel
carriers like FedEx (NYSE:FDX), and airlines like JetBlue, as well as
trucking companies such as Swift Transportation and Knight Transportation
(NYSE:KNX) which stand to benefit from the ongoing backlogs at the West
Coast ports.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

MATHISEN: Joining us now to discuss the headwinds to the market is
Steve Auth, Federated Investors (NYSE:FII) chief investment officer. His
firm manages more than $360 billion.

And Reva Bhalla, she`s vice president of global analysis at Stratfor,
a global intelligence and advisory firm.

Welcome to both of you.

STEVE AUTH, FEDERATED INVESTORS CHIEF INVESTMENT OFFICER: Thank you.

MATHISEN: Steve, as we began the broadcast, we talked about how
sometimes stocks were able to step past tensions around the world. Lately,
not so much.

How worried should investors be that what`s going on in Yemen, the
Southern (NYSE:SO) Arabian Peninsula, could actually be something that will
trip stocks not just for a day or two but for a longer period?

AUTH: Well, Tyler, we are — as you know, we`re long-term bulls. We
think the market is much higher. However, we have been calling for 5
percent to 10 percent correction.

Sometimes the markets get stretched and they almost look for a reason
to sell off. And we have four of five we think are going to come into play
here. And we`re starting to see them.

One is concerning the Fed and the interest rates. Two is oil. Three
is the economic numbers in the first quarter. We think they are going to
be still off and then certainly, earnings, we think the first quarter
earnings number could be the worst earnings season in a while. So, there`s
a lot of near term concerns.

On the other hand, if you look through to the second half of the year,
almost everything we`re worried about right now is going to reverse. We`re
pretty convicted on that.

And so, we think we`re going to have a strong back after the year,
Tyler. And at some point, people start looking through that. But in the
meantime, not surprised to see some pullback here.

You know, the Mideast concerns are what they are. I mean, that kind
of goes on and on. Yemen is not a big oil producer.

Reva, put it into perspective for us. Although the conflict and the
fighting in Yemen certainly is disturbing on perhaps many different levels,
the worry from an investment standpoint and oil standpoint is really
concerning with Saudi Arabia. Is that correct?

REVA BHALLA, STRATFOR VP OF GLOBAL ANALYSIS: Yes, absolutely. I
mean, even as we see with the Saudi led coalition leading an air campaign,
as well as a naval blockade on Yemen`s port, the intent there is also to
protect the Bab el-Mandeb Strait. So, those blockade operations are not
necessarily going to impede transport through that strait. You know,
there`s always the risk of some sort of harassment and retaliation.

But Iran, for example, has very difficult projection capabilities when
it comes to conventional military capability in that area. So, really, the
focus is going to be on Saudi Arabia and the blowback from these
operations. So, that involves cross border attacks by Houthi guerillas.
It also involves, you know, the persistent threat of jihadist attacks in
Saudi Arabia. That`s something that`s always going to continue to spook
the markets and certainly, the idea of a Saudi-led force in Yemen where
collateral damage is, of course, a part of any big military operation like
this, that is prime fodder for the number of jihadists operating in this
region and who see Saudi as a prime target as well.

MATHISEN: Reeva, quick answer if you may. I was at a presentation
some time ago where the presenter from the Rand Corp said even as worried
as the U.S., Israel and West are about Iran and the potential for them to
have a nuclear weapon, most of the Arab counties, Saudi Arabia, Jordan, and
others, are even more worried about Iran.

Do you agree with that?

BHALLA: Well, naturally. You know, the Saudis are not comfortable
with the idea of a U.S./Iranian developing rapprochement. They basically
see a U.S./Iranian deal giving a pass to the Iranians and a number of these
proxy conflicts, whether it`s making sure that the conflict in Syria is
focused on ISIS and not the Assad regime and ensuring in Yemen, you know,
that the Saudis obviously have an interest in applying a lot of force
there.

The U.S. can basically provide logistical support but it`s going to be
playing all sides of this conflict. It still needs a working relationship
with the Iranians. And so, therefore, you see a very assertive Sunni
alliance led by Saudi Arabia.

HERERA: Steve, given the fact that as Reva just outlined and as you
mentioned, the problems in the Middle East are going to be with us for some
time. So, if you — if you take that out of the market equation, where do
you see stock prices going long-term bullish, and where would you invest
given we`re seeing kind of weaker economic data and the transports also
seem to be a little bit weaker lately?

AUTH: Right. Well, first of all, right now, I`d be behind the
transports. So, I`d be selling oil. We think there`s an oil oversupply
problem that has yet to be corrected, Sue, and we see oil piercing the oil
lows and probably heading down into the 30s before this is over. I think
those were still, the stocks waiting a chance to get out.

We would be defensive here. We like the interest rate that`s going
to, right about where things are heading, and the yields head lower. Those
interest rate stocks will perform with it. And so, near term, we`ll be
defensive and in here in the next couple of months as we get through this
earnings season, I think that will be the chance to reload the boats on the
cyclicals and the industrials and the text —

HERERA: And now to Washington where the Consumer Financial Protection
Bureau is proposing new rules for payday loans. The proposal requires
lenders to verify that customers can afford to pay debt before allowing
them to take out a loan. The plan which will be under review for months
would help rein in the $50 billion industry to prevent low income borrowers
from taking on more debt.

MATHISEN: Where a display of bipartisanship on Capital Hill. Last
week, we told you that House Democrats and Republicans were closed to
fixing a long standing problem over how Medicare pays doctors. Today, the
deal got done.

John Harwood joins us from Washington.

John, what was the Medicare reform that the House passed today?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, first of
all, Tyler, not only got done, it got done with 392 votes out of 435
members. That`s an extraordinary level of support for any member in the
Congress.

What they did was regularize the payment schedules for doctors who
treat Medicare patients. Those schedules had been periodically interrupted
by a formula that was passed, that didn`t work out as intended, back in the
1990s, and the result was that doctors were uncertain about their incomes
and Medicare beneficiaries were uncertain about doctors as a result.
That`s a bad formula for politicians and that`s why, ultimately, this $200
billion package was agreed to by both parties, by John Boehner and by Nancy
Pelosi.

HERERA: All right. But now, here comes the Senate. And what happens
next?

HARWOOD: There are some objections by some Democratic senators, in
particular, to the fact that the children`s health insurance program which
is part of this deal is only extended for two years rather than four. Some
question about abortion language.

So, it looks like it`s not going to be able to pass tonight before
lawmakers leave on a two-week recess but it is very likely to pass, Sue, as
soon as they get back in two weeks.

And, again, it is quite remarkable that you can have a deal that draws
such overwhelming support for both parties, that has some Medicare reforms.
People with high incomes of $133,000 will pay higher Medicare premiums, and
Medicare beneficiaries won`t be able to have all their deductibles covered
for doctors under their insurance plans. That will increase their costs in
hopes of getting them to use less medical care.

MATHISEN: Does this tell anything about chances for action on other
issues, tax reform or the budget?

HARWOOD: Not likely. One can always hope, but I talked to a
Republican member of Congress the other day about the prospects for
corporate tax reform and it seems clear both from the Republican
perspective and the from White House perspective that`s going to be a
bridge too far in this Congress.

MATHISEN: All right. John, thank you very much. John Harwood in
Washington.

HERERA: And still ahead, we`ve been telling you about the backlog at
the West Coast ports but now the problem is starting to come home to roost
for some companies. We`ll tell you which ones in a moment.

(MUSIC)

HERERA: As we mentioned earlier, unsettling news out of Europe today.
The co-pilot of the Germanwings flight appears to have deliberately crashed
that plane into the French Alps, killing all 150 people on board.
Officials say the 28-year-old German national Andreas Lubitz wanted to
destroy the aircraft and lock the pilot out of the cockpit.

Joining us now is someone very familiar with the airline industry,
former Continental CEO Gordon Bethune.

Gordon, good to see you again.

GORDON BETHUNE, FORMER CONTINENTAL CEO: Thanks, Sue. Glad to be
here.

HERERA: From a business perspective, airlines — do they need to be
held to a higher standard in terms of knowing background information about
their employees, given the fact that they are taking people, putting them
in a plane and flying them to various destinations, or is the standard the
same as any other business that`s being run?

BETHUNE: I think, you know, various companies have different
approaches. Most of them do psychological battery exams. There`s a lot of
interview and a lot of background course. You have to have technical
proficiency. So, they get I would consider extraordinary screening.

MATHISEN: Is that screening whether it is thorough enough at the
initial point, is it repetitive enough, Gordon so that people who may run
into personal problems, not in year three of their employment but in year
23 of their employment are checked up on periodically, sufficiently?

BETHUNE: Well, there is kind of an information system within each
company. Obviously, there is employee assistant programs for alcoholism
and other forms of depression.

So, while it may not be a formal one, they`re so close together for so
much times they do have a way to report on abnormal behavior. But no,
there`s not any predictive type of examinations on a regular basis that I
know of, that I know of.

HERERA: It`s a high pressure job though being a pilot or co-pilot.
Is it not?

BETHUNE: Well, actually, it`s kind of boring. The airplane is so —

HERERA: Really?

BETHUNE: Well, the excitement of taking off and landing is always
exhilarating, but the 12-hour trip to Hong Kong or something, it`s pretty
much straight and level, and the airplane is doing the flying. So, it`s
not as exciting, you know, as you might think.

MATHISEN: You know, we made the doors to the cockpit much more
impregnable in the wake of 9/11. And other protocols were put in place.

Do you see anything in the airline protocols that could or should be
changed to make this kind of incident less likely to happen? I understand
that in the U.S., if a pilot leaves the cockpit, another crew member needs
to be in, so there`s always two people in the cockpit, that that practice
was not followed routinely in Europe.

BETHUNE: That`s true, Tyler. And I think that may be the fatal flaw
here. It is a good idea. Always have a back-up. You never know and when
you`re in there by yourself, it`s anything can happen. So I think they
will probably follow the U.S. kind of process in their regulatory
requirements to have an additional crew member in the cockpit at all times.

HERERA: What about liability, quickly, Gordon, if you would. The
liability for airlines, is the bar set higher? Does it cost them more
because of the nature of their business?

BETHUNE: Well, whole insurance, and other things very expensive
because you`re insuring expensive airplanes, and, of course, personal
liability, your track record is amongst the brokers` discussion. But, you
know, each airline has its own insurance program.

But it`s never been safer. I know this is a horrible accident.
Everybody is upset about it but air travel today is safe as it`s ever, ever
been and the overall damage to the liability I don`t think the going to
make a difference here.

HERERA: All right. On that reassuring note, Gordon, thank you. Nice
to see you again.

BETHUNE: Thanks, Sue. Nice to see you again. Thanks.

HERERA: Gordon Bethune, former Continental Airlines CEO.

MATHISEN: And a pilot himself.

HERERA: Indeed.

BETHUNE: Yes.

Shares of SanDisk (NASDAQ:SNDK) plunged to a one-year low and that is
where we begin tonight`s “Market Focus”.

SanDisk (NASDAQ:SNDK) which makes flash memory storage devices cut its
sales forecast for the current quarter and the full year, the company cited
lower than expected sales of enterprise products and lower pricing in some
areas of its business. Shares fell 18 percent to $66.20.

Earnings from the mobile homemaker Winnebago shifted into low gear,
missing analysts` estimates. Company blamed higher expenses because of
initiatives and increase in legal and maintenance costs. Shares fell 14
percent to $20.39.

Strong holiday sales at Lululemon helped beat the athletic apparel
maker beat Wall Street expectations. But the company issued a rather weak
outlook for the current spring quarter, citing shipping delays at West
Coast ports and bad winter weather. Even with the warning, shares of Lulu
were up 5 percent to $63.97.

HERERA: Scholastic (NASDAQ:SCHL) posted a wider than expected loss as
a stronger dollar hit international sales and the company saw declines in
other business segments. The publisher said those losses offset strong
sales from its Minecraft video game, which is big in my house, and also its
children`s book business. Shares off Scholastic (NASDAQ:SCHL) is off
fractionally at $37.94.

ConAgra`s quarterly profit came in ahead of expectations, thanks to
cost cuts and company raised its earnings forecast for the year. But the
maker of Slim Jims and Chef Boyardee said it took a nearly $1.5 billion on
its struggling private brands business and the West Coast port disruptions
also had an impact. ConAgra shares fell about half a percent, $234.75.

Consulting firm Accenture raised its full year sales forecast for the
second time. The company also posted revenue growth of 5 percent for its
latest quarter, thanks to growth in its outsourcing business. Shares rose
about 7 percent to $94.17.

MATHISEN: Back to the economy now, where the number of Americans
applying for unemployment benefits fell to a five-week low in the most
recent week. That`s a good sign for the labor market. Weekly claims fell
by 9,000 to a seasonably adjusted 282,000. That is the lowest level since
mid-February.

HERERA: Fed officials, money managers and chief executives are in
Detroit for a two-day symposium, offering their views on the economy and
the markets.

And Steve Liesman was there.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Atlanta Federal Reserve President Dennis Lockhart still sees a rate hike
from the central bank likely this year, maybe as soon as June or as late as
September. But he said the economy was soft right now and the
strengthening of the dollar is a bigger factor than he thought it would be.

DENNIS LOCKHART, ATLANTA FEDERAL RESERVE PRESIDENT: In the beginning
when the dollar declined, I was prepared to, to some extent, dismiss the
influence of the dollar as being not great because our economy is not so
export dependent but I`m upgrading it as a factor to watch.

LIESMAN: Lockhart said economic weakness and the effects of a dollar
are likely transitory. He was speaking at the Engage Investment Conference
that brings together 1,300 students from around the country for a two-day
deep dive into finance and economics.

(on camera): Also one of the engaged panels, TD Ameritrade
(NASDAQ:AMTD) President Fred Tomczyk who said recent stock market
volatility up 200, down 200 another day is here to stay and he connected it
to potential interest rate increases by the Federal Reserve.

FRED TOMCZYK, TD AMERITRADE PRESIDENT: I`ve been saying for six or
nine months now that there`s so much stimulus in this system for monetary
stimulus for the Federal Reserve banks, most of the developed world to be
honest, that when they start to pull that away, there`s no way to come
without volatility. And we`re seeing that right now.

LIESMAN (voice-over): Among the student attendees were several who
were involved in actually managing portfolios and they`re keeping a close
eye on markets.

JASON GEORGE, WAYNE ST. UNIVERSITY STUDENT: I think Stratus
continually a strong company and continue to hold it for the next year.

LIESMAN (on camera): Why European hedged equities?

PATRICK BRESNAHAN, WAYNE ST. UNIVERSITY STUDENT: Well, it`s an
interesting position we have. It`s long European equities that do most of
their business outside of Europe but are based on the continent and it`s
also a hedge position. So, it goes long dollar, short to the euro.

LIESMAN (voice-over): Who said you can`t be both young and wise?

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman in Detroit.

(END VIDEOTAPE)

MATHISEN: Coming up, house flippers are back, buying distressed
properties and selling them for a quick profit. But this time, there`s a
twist. We`ll tell you about it.

(MUSIC)

HERERA: And here`s a look at what to watch tomorrow. Federal Reserve
Chair Janet Yellen is giving a speech on monetary policy in San Francisco.
The third and final read on fourth quarter GDP is due out before the
opening bell and the University of Michigan sentiment index gives us a read
on how the consumer was feeling about the economy this month.

MATHISEN: Well, as home prices continue to rise, house flippers are
coming back into many markets. They`re buying, rehabbing and quickly
selling. But this time around is different. They`re doing it with a new
brand of funding.

Diana Olick explains from Bolingbrook, Illinois.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Ben Walhood is
flipping suburban Chicago homes full-time at a fast clip. But he`s getting
no help from the big banks.

BEN WALHOOD, HOUSE FLIPPER: W2 without a pay stub. They really won`t
even process the application.

OLICK: In this new era of tight lending, Walhood instead turn to the
crowd, a crowd-funding platform called Realty Shares.

OLICK: Like Walhood, Chicago area homes. For a minimum of $5,000, a
credited investor can get in on his flip and in return, he gets the money –
– albeit, a far higher interest rate than the big bank.

WALHOOD: You can say we`re making less profit because we pay the
higher rates. I would look at it a different way, that if we were trying
to work with the banks, we`d be lucky if we did one or two projects a year.
And working with reality shares, we`ve done 12 in that last 12 months.

OLICK: Walhood had been able to crowdfund his project in as little as
an hour. Demand is clearly strong, even for high end house flips like this
one in Los Angeles, which Realty Shares also facilitated.

But risk, says Athwal said, is not as high.

ATHWAL: So far, we have no defaults. No major issues with any
projects and I think that really goes to our underwriting criteria and the
strictness with which we adhere to and looking at property.

OLICK: Only about one in 10 properties that come through Realty
Shares get lifted, according to Athwal, but once they do, they turn a fast
profit.

Walhood has flipped homes like this one price from $100,000 to half a
million dollars, rarely even knowing who funded the deal.

WALHOOD: I`ve had one investor reach out to me via LinkedIn
(NYSE:LNKD), introduce himself and just kind of say, hey, thanks for
putting my money to work. Great job. Keep it up.

But for the most part, it`s anonymous. I never get to find out who`s
investing in the projects.

OLICK: But he does get to see a return. Big return.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Bolingbrook, Illinois.

(END VIDEOTAPE)

HERERA: And it`s the end of an era for “Downton Abbey” fans, of which
I am one. The producers of the program said the drama will end after the
upcoming sixth season. The show has won three Golden Globes and became the
most nominated non-U.S. show in Emmy history with 51 nominations. Season
six will debut on Masterpiece on PBS in January. Sad.

MATHISEN: And thanks from me as well. I`m Tyler Mathisen. Have a
great evening, everybody. Hope you join us right back here tomorrow night.

END

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